Taxability of works contract prior to 1st June, 2007

Works Contract prior to 1^st June, 2007 – A Taxable Service or Not

“In a contract of sale, the main object is the transfer of Property and delivery of the possession of Chattel as Chattel to the buyer, where it is not, it is a contract of Works and Labour”                                                      

                                                                                                                [In Hindustan Shipyard Ltd.(Supreme Court)]

Works contract is a composite contract for the supply of material and procurement of services/labour wherein the goods are not transferred as such i.e. where the nature and form of goods changes after the execution of sale. Works contract is an indivisible contract for supply of material and labour, a responsibility is cast upon the contractor for completion of the whole contract and not merely for supply of material or supply of labour. The same is explained with the help of an example given below:

In a contract for building, which involves the combination of cement, steel pipes, stones, labour etc i.e. where the goods (i.e. cement, steel pipes, stones etc) are not transferred as such but as a building will be treated a works contract if the contractor is not absolved of its responsibilities till the completion of the building. However, if the contractor is merely responsible, either for the supply of material or for the supply of labour, the contract will not be treated as a works contract.

The legal sanctity to the works contract was given by inserting Article 366(29-A) in the constitution whereby interalia works contract was included as a deeming fiction of sale.

Works Contract Service

Works contract was brought within the ambit of service tax with effect from 1^st June, 2007 through Finance Act, 2007. Prior to the introduction of the works contract service, there was confusion in the industry regarding the taxability of various services used in the course of execution of the works contract due to the indivisible nature of the contract.

Existing Confusion regarding taxability

The taxing authorities are of the view that after the insertion of Article 366(29-A) in the Constitution, it is lawfully permissible to vivisect the works contract and accordingly, various taxable services such as consulting engineer service, erection, commissioning and installation service etc used in the course of execution of the works contract are taxable even prior to 1^st June, 2007. The view of the department was accepted in a series of judgments. In the case of Commissioner of Central Excise vs. BSBK Pvt. Ltd 2010 (253) ELT 522 (Tri-Del),  it was held that works contract (i.e. turnkey contract in the instant case) can be vivisected and discernible service elements involved therein can be segregated and classifiable as well as valued for the levy of service tax. Recently, in the case of M/s Alstom Projects India Limited Vs CST, Delhi 2011-TIOL-459-CESTAT-DEL, the Hon’ble tribunal held works contract prior to 1^st June, 2007 can be vivisected and subjected to service tax under the appropriate head. The major observation of the Tribunal is summarized as below:

• The Finance Act, 1994 does not require taxable services to be standalone services in order to attract service tax.
• Service Tax is a tax on the activities specified in Section 65 (105) of the Finance Act, 1994 and the same would be chargeable in respect of any contract when the same is discernible.
• Dismissal of department’s SLP in the case of Daelim by the Hon’ble Supreme Court is not binding as provided under Article 141 as the dismissal is a summary dismissal and is without any reasons.
• Decision of Karnataka High Court in the case of Turbotech precisions is not a binding precedent as this judgment does not discuss how works contract prior to 1^st June, 2007 is not taxable under different taxable service heads.

Contrary to this, the taxpayers are of the view that works contract is not taxable under any other head of taxable service prior to 1^st June, 2007 due to the indivisible nature of the contract. The view was accepted by the tribunal in the case of Daelim Industrial Co. vs. CCE 2006 (3) STR 124 (Tri-Del) and Diebold Systems (P) Ltd. Vs Commissioner of service Tax, 2008-TIOL-489-CESTAT-MAD, wherein it was held that works contract cannot be vivisected and part of it cannot be subjected to tax. The view of the tribunal was also accepted by the Karnataka High Court in the case of C.S.T. Vs Turbotech Precision Engineering Pvt. Ltd 2010 (18) STR 545. Further, in a recent judgment given in the case of CCE, Raigad vs Indian Oil Tanking Ltd. 2010-TIOL-1015-CESTAT-MUM, the Hon’ble Tribunal of Mumbai held that service tax can be levied on the service portion involved in the execution of works contract only from 1^st June, 2007 and not prior to that. The view of the tribunal is summarized as below:

• Deeming fiction created by the 46^th amendment is not to be looked for the interpretation of service tax as the said amendment is brought for the purpose of sales tax.
• No provision of law creates a deeming fiction so as to levy service tax on the service portion involved in the execution of works contract prior to 1^st June, 2007.
• Dismissal of department’s SLP in the case of Daelim by the Hon’ble Supreme Court has a binding effect.

Authors View

There appears to be a difference of opinion in respect of taxability of works contract prior to 1^st June, 2007 among the judiciaries across the country. Whenever, there is any ambiguity i.e. confusion, one should revert to the object behind the introduction of the new levy.

Letter No. F.No. 334/12007-TRU dated 28^th February, 2007 issued by the Department of Finance along with the Budget 2007-08 clearly signifies that the proposed taxable service is to levy service tax on the services involved in the execution of the  works contract. Thus, the intention of the law appears to tax various services involved in the execution of the works contract only with effect from 1^st June, 2007. This view is further substantiated from the following:

• Harmonious Interpretation of Law: One of the principles of interpretation of law is Harmonious Interpretation of Law i.e. when there is a conflict between two provision, they should be interpreted in such a way that none of the provison turns redundant. If the view i.e. works contract prior to 1^st June, 2007 is taxable under different existing taxable services head is accepted, it will make Section 65 (105) (zzzza) redundant, as the services mentioned therein were already covered under the existing list of taxable services.
• Addition and not a subtraction from a pre-existing entry: Ratio laid by the Hon’ble Bombay High court in the case of Indian National Shipowners Association (2009) 14 STR (Bom) wherein it was held that where an activity is covered under a new taxing entry then such entry cannot be made taxable under any earlier entry. In other words, in the ever-widening sphere of service tax, addition of an item to the list of taxable services is just an addition, and not a subtraction from a pre-existing entry.
• Interpretation by Courts of Law: Dismissal of the departments SLP by the Hon’ble Supreme Court in the case of Daelim indicates the acceptance of the position as laid in Daelim case. A similar view was also given by the Karnataka High Court in the case of Turbotech precisions.